Update on India’s mandated CSR for Large Companies
30th July 2015 | By Grainne |
I’ve previously written about my interest in the development of India’s legal requirement that larger companies spend 2% of pretax profits on Corporate Social Responsibility (CSR) initiatives. I came across this article which raises a number of problems in relation to this attempt to “mandate virtuous behavior by businesses”.
The writer points to the lack of penalties for non-compliance. Penalties can be enforced on companies only for failing to report on spending rather than on not spending the required amount. It could however be argued that in the interests of pragmatism it is far easier to track companies who fail to report and that those who do actually spend the required amount are likely to want to shout about it. However with news reports in India suggesting that as many as two-thirds of companies have failed to meet their obligations it does not appear that penalties for failing to report are being enforced.
Prime Minister Modi is encouraging firms to use their funds towards pet projects of his such as the building of public toilets and the hiring of apprentices. Both of these initiatives have the potential to increase well-being through better health and safety and increased ability to earn a living. As well as the obvious general health benefits, the provision of public toilets protects women from attack as they don’t have to go to outlying areas looking for privacy. Apprentices gaining skills equips them to get jobs and provide for their families. One of the criticisms raised in the article is that firms will go for the more PR and photo-friendly option of building a toilet block rather than donate to the hidden task of fixing the sewage systems. The writer also points to the implicit acknowledgement of failure by government to provide basic services to the population.
The article also makes reference to the concern that the law may actually exacerbate inequality and fail to help the poorest citizens. The bigger firms tend to be located in wealthier areas with better infrastructure and they tend to support local projects rather than projects in the more remote areas. Most of us understand the instinct to improve conditions locally but maybe these businesses should also consider their longer term strategy. Over time they will need to expand their customer base and probably widen the pool of recruits to employ in the business. Helping poorer areas through development of infrastructure, better healthcare and education will over time develop these markets leading to a greater pool of people educated to be part of the workforce and in turn earning more money to lift them out of poverty and allow them be consumers of goods and services. The innovation of business and its access to technology could also provide opportunities to leapfrog development stages leading to giant steps in underdeveloped areas at relatively low cost.
Another concern raised is the possibilities offered for corrupt practices to flourish. The 2% rule may provide a chunk of money to be channeled through layers of bureacracy with commissions siphoned off or kickbacks offered in return for favours. Cronyism with money channeled to favoured contacts and their pet projects is an obvious danger.
So we continue to watch the Indian experiment with mandated CSR spending. No doubt there will be many more critiques and analyses. The hope is that there will also be many successes which bring real benefits to the country’s citizens.